Just as you add value to your customer experience by demonstrating all the benefits of the vehicles you sell and service, you should also review the benefits of any accounting processes that can help your dealership continue to steer for success. Here are six accounting tips for your year‐end tune‐up.
Accounting for Employee Retention Credits
The Employee Retention Credit (ERC) is a refundable payroll tax credit available to taxpayers who either experienced a full or partial suspension of business operations due to government orders or had a significant drop in gross receipts during 2020 or 2021. The ERC is calculated as a percentage of qualifying wages. While the ERC is claimed on an entity's tax return, it is not based on income, and therefore is not within the scope of Accounting Standards Codification (ASC) 740, Income Taxes. Instead, the ERC is more akin to a government grant. There is currently no authoritative US GAAP explicitly addressing the accounting for government grants to business entities. Entities will need to analogize to either IAS 20 or ASC 958‐605 in accounting for the ERC.
- IAS 20 – Income may be recognized when there is reasonable assurance that the conditions attached to the grant will be met and the grant will be received. This model allows for a probability assessment to be made in determining the timing of income recognition.
- ASC 958‐605 – Income may be recognized once the conditions attached to the grant have been substantially met. This model does not allow for a probability assessment to be made in determining the timing of income recognition.
Accounting for PPP and PPP 2nd Draw
While there are four appropriate models when accounting for Paycheck Protection Program (PPP) loans, the two most common methods we have seen dealerships utilize are found under ASC 470, Debt, and International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
Debt (ASC 470) – Recognize funds received as a legal form of debt and the debt would be derecognized when either of the conditions in ASC 405‐20‐40‐1 is met:
- The loan has been paid back, and the debtor is relieved of the liability obligation.
- The loan is forgiven, and the debtor is legally released from being the primary obligor under the liability.
Grant (IAS 20) ‐‐ Recognize funds received as a deferred income liability and recognize income once there is reasonable assurance that conditions will be met.
Floor Plan and Advertising Assistance Programs
Floor plan assistance received from automobile manufacturers should be accounted for as a reduction to new vehicle inventory and the floor plan assistance reduces the cost of sales when the unit is sold.
Manufacturers will also agree to grant allowances to a dealership for advertising the manufacturer's vehicles. Depending upon the nature of the advertising allowance will dictate how it should be accounted for. If the advertising allowance can be characterized as a reimbursement to the dealership for a specific, incremental, identifiable cost (advertising campaign) incurred by the dealership in selling the vehicles then the dealership should treat the allowances received as an offset to advertising expense. If the advertising allowance cannot be traced to a specific advertising cost incurred, then the dealership should treat the allowance as a reduction to inventory and recognize the reduction to cost of sales when the unit is sold.
The revenues and expenses related to internal work performed by the parts and service departments on new and used vehicle inventory should be eliminated. Additionally, profit generated by internal repair orders for vehicles that remain in inventory at year‐end should be reserved.
Dealerships have commission arrangements with third‐party lenders and insurance administrators which typically result in the dealership earning financing or insurance income. Depending upon the structure of the arrangement, dealerships may be subject to a chargeback if the contract is prepaid, defaulted upon, or terminated by the customer. If the dealership is subject to future chargebacks the dealership should estimate an allowance for them. Most dealerships utilize historical chargeback experience to estimate the proper reserve.
The dealership industry has continued to experience robust M&A activity and companies should ensure they are properly accounting for these transactions. Most dealership acquisitions will fall under business combination accounting guidelines and should be accounted for using the acquisition method of accounting. Under this method, the acquirer should record all assets acquired, liabilities assumed, and non‐controlling interest acquired at fair value. Some common issues that we've noted in this area are as follows:
- Real estate acquired – ensure real property purchased is recorded at fair value which may be higher or lower than the actual cash paid.
- Goodwill vs other intangible assets – most dealerships acquired will have a franchise right associated with it that should be separately measured as part of the acquisition accounting.
- Non‐controlling interest – for an acquisition where less than 100% of the equity interests in the acquiree is held at the acquisition date the acquirer needs to record the fair value of the noncontrolling interest which can be a difficult process
Quick reminder: upcoming lease standard for 2022
The new lease standard (ASC 842) will be effective for all private companies beginning in 2022.
How DHG can help
DHG Dealerships: With DHG Dealerships, you gain a collaboration with professionals who have a comprehensive understanding of all facets of dealerships accounting and operations. Please let us know how we can put our dealership insight, technical knowledge, and future-focused approach to work for you.
We also invite you to click here to learn why Forbes named DHG one of America's Best Tax and Accounting Firms.